Finance Seminar（2018-17）

Topic: The Risk of Implicit Guarantees: Evidence from the Shadow Interbank Market in China

Time: Thursday, 20 September, 12:15-13:45

Location: Room 216, Guanghua Building 2

Abstract:

Although implicit guarantees are widely used in the shadow banking system, we know very little about its qualitative and quantitative properties. In this paper, we use a micro-level data set on China's shadow interbank products to quantify the risk of implicit guarantees. We find a robust empirical fact that banks extend more implicit guarantees to their shadow bank products when their own solvency risks increase. A simple model that is based on a signaling game is proposed to rationalize this fact. The key mechanism of the model is that as a bank's reputation becomes worse, it has stronger incentives to send positive signals to the market, i.e., to guarantee returns of its shadow bank obligations. Since signaling is supposed to be costly, bad reputation has nonlinear negative effects on the bank's financial health.

Introduction:

Dr. Ji Huang is an Assistant Professor in Economics from The Chinese University of Hong Kong. He obtained his Ph.D. in Economics from Princeton University in 2015, He holds M.A. in Economics from Nankai University in 2009, and B.A. in Management at The Southwestern University of Finance and Economics in 2006. Professor Huang served in the Department of Economics, National University of Singapore from July 2015 to July 2018. Prof. Huang’s research interest mainly focuses on the development of Chinese and Global Banking, especially the development of shadow banking and the impact of these developments in financial risks and financial regulation. His latest paper on shadow banking is forthcoming in theJournal of Economic Theory.

//jihuang.weebly.com/

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